Aggregate profit of the GCC banking sector (banks under coverage excluding DIB and Burgan bank) posted a decline of 5%YoY and 10%QoQ in 2Q10. Poor bottom-line performance was exhibited by UAE banks that declined by 30%YoY with a further dampening act coming from KSA banks which were down by 7%YoY.

n GCC banks’ top-line barely inches forward The aggregate net interest income of GCC banks grew by a meager 1%YoY, spelling out stagnancy in the top-line. The loss in momentum came about as sheer stagnancy in loans haunts the GCC banking sector while NIMs stayed under pressure. As per our universe, loans growth remained diminished, growing 3.5%YoY in 2Q10 and 0.7%YTD while aggregate NIM of our GCC banking universe tapered-off by 12bps over 2Q09.

n Top-line of Qatari banks outclasses all… Different movements in net interest income (NII) were seen across countries with KSA and Qatar at the opposite ends of the spectrum with a 9%YoY decline and a 26%YoY jump, respectively. Qatar’s NII rode well due to a 46%YoY jump is QNB’s top-line. Shrinkage was observed in the NII of Kuwaiti banks while that of UAE exhibited a healthy growth.

n GCC banking sector provisions slightly higher; UAE most affected, Oman best-off Provisions, mostly emanating from loan defaults, shifted gears during the quarter under review, after taking a breather in 1Q10, leading to a massive 48%QoQ rise in 2Q10. UAE stood out from its neighbours in the region given the fact that almost half the provisions taken in 2Q10 came from its banks followed by KSA which contributed 23% to the provisions taken.

n Recommendation – POSITIVE on Qatar, UAE banks to come under pressureGauging a pick up in macro-economic activity across the GCC and certain country specific risks, we maintain our POSITIVE stance on Qatar and NEUTRAL on the banking sectors of the remaining GCC countries. That said, GCC banking sector is expected to show an increase in provision in the coming quarters, related mostly to those trickling in from UAE. Banks in the UAE are anticipated to tighten their belts in the wake of expected issuance of guidelines from the Central Bank related to provisioning for exposure to Dubai World and related entities.

Banking Sector Performance – 2Q10Aggregate profitability hiccups on account of UAE banks Aggregate profit of the GCC banking sector (banks under coverage excluding DIB and Burgan bank) posted a decline of 5%YoY and 10%QoQ in 2Q10. Poor bottom-line performance was exhibited by UAE banks that declined by 30%YoY with a further dampening act coming from KSA banks which were down by 7%YoY. Being heavyweights in our GCC banking universe profitability (2Q10 profit share of 19% and 46% respectively), banks indigenous to these two countries led the slide in overall profitability of the GCC aggregate, while those from the remaining countries fared much better. Banking sectors of Oman and Kuwait earned the spot-light with growth of 40%YoY and 34%YoY respectively.

Aggregate top-line barely inches forward, Qatar’s outclasses all… The aggregate net interest income of GCC banks grew by a meager 1%YoY, spelling out stagnancy in the top-line. The loss in momentum came about as sheer stagnancy in loans haunts the GCC banking sector while NIMs stayed under pressure. As per our universe, loans growth remained diminished, growing 3.5%YoY in 2Q10 and 0.7%YTD; similarly aggregate interest earning assets grew 3.4%YoY and 0.6%YTD. Moreover, aggregate NIMs of our GCC banking universe taperedoff by 12bps over 2Q09. Different movements in net interest income (NII) were seen from country to country with KSA and Qatar at the opposite ends of the spectrum with a 9%YoY decline and a 26%YoY jump, respectively. Qatar’s NII rode well due to a 46%YoY jump is QNB’s top-line. Shrinkage in the vicinity of 4%YoY was also in the NII of Kuwaiti banks while that of UAE exhibited a healthy growth of 9%YoY. Meanwhile Omani banks remained relatively stagnant with an increase of just over 2%; an outcome of opposing movement in spreads and volumes.

GCC banking sector provisions slightly higher; UAE most affected, Oman best-offTotal earnings growth of the GCC banking sector came under considerable pressure owing to continuation of high provisions during 2Q10. While the top-line barely moved YoY, provisions grew by 5%YoY. Provisions, mostly emanating from loan defaults, shifted gears during the quarter under review, after taking a breather in 1Q10, leading to a massive 48%QoQ rise in 2Q10. UAE stood out from its neighbours in the region given the fact that almost half the provisions taken in 2Q10 came from its banks followed by KSA which contributed 23% to the provisions taken.

Almost all UAE banks within our universe witnessed a high growth in provisions, led by ENBD and ADCB which were most affected by exposure to Dubai World and related entities. The case in KSA was different with a majority of banks portraying an ease-off in provisions except for SIBC, SABB and RIBL. Albeit, these banks (in KSA) have not indicated the reason behind the jump in provisions, we suspect these could be related to exposure to Sa’ad and Algosaibi. Within Kuwait, banks in general saw a decline in provisions YoY, as 2Q09 was a bad quarter in terms of high provisioning requirements coming from Sa’ad and Algosaibi; provisions also came from troubled investment companies. Furthermore, NBK seems to be the only Kuwaiti bank to have attained precrisis provisions levels while maintaining a high coverage ratio. However, provisions of KFH and Gulf Bank stayed high; Gulf Bank’s management, nevertheless stated that 2H10 will be much better in terms of provisions, hinting at a switch in provisioning regime. The rise in aggregate provisions took a toll on aggregate earnings, eroding as much as 25% of the total GCC banking profit. The effect was more profound in UAE banking aggregate where 41% of the total income was lost to provsions; the second highest in at least the last 15 quarters. Among all countries only Oman’s provisions seem to have returned to normalized pre-crisis levels while that of the remaining countries are still considerably high.

GCC banking sector to see another round of high provisions in 2H10 The GCC banking sector is expected to show an increase in provision in the coming quarters, related mostly to those trickling in from UAE. Banks in the UAE are anticipated to tighten their belts in the wake of expected issuance of guidelines from the Central Bank related to exposure to Dubai World and related entities. Albeit ADCB, one of the most exposed banks to DW and related entities has already taken the hit in 2Q10, other banks are still to follow suit. Moreover, additional provisions are expected due to changes in the Central Bank’s regulations. While profitability of UAE banks in 2H10 is expected to be lower than the first half, we may see that of other countries to fare better, with easing off provisioning requirements.